Saturday, June 26, 2010

Are Chinese Small-Caps a Good Buy?

While most of the world continues to struggle through debt issues and oil spills, the Chinese economy refuses to bow to its critics. But despite the country's incredible growth, some are raising a warning flag over a potential bubble in the Chinese economy.
Credit and property prices are exploding — yet the dissenting voices contend that massive government stimulus programs are propping up the growth.
The mainstream media are beginning to echo these China bubble warnings. Consider a recent Bloomberg article in which James Rickards, former general counsel of hedge fund Long-Term Capital Management LP [Ed. Note: Yes, that Long-Term Capital Management], claims the Asian giant is smack in the middle of "the greatest bubble in history."
That’s a bold statement considering the world’s recent dealings with the credit crunch and multiple property bubbles, both domestic and overseas.
But we all know that fear is contagious. And it would appear some investors have bailed on China’s growth prospects in favor of greener - and safer - pastures.
However, in our opinion, investors who sold China early may have made a huge mistake...
Sure, some experts have raised legitimate concerns over certain facets of the Chinese economy. However, this does not mean opportunity has ceased knocking. Even though the Chinese economy slumped with the rest of the world during the recent recession, it has quickly returned as one of the fastest growing markets in the world.
While reporting on China's stronger-than-expected first-quarter growth earlier this year, Reuters noted that the Chinese government is "already winding back its anti-crisis investment spending and has ordered banks to reduce new lending by more than 20% in 2010."
What investors should focus now are retail sales, specifically electronics.
The Rural Spending Boom
China's electronics market, which includes computers, mobile phones and traditional personal electronics such as televisions and CD players, will be worth more than $150 billion this year, and is expected to increase to approximately $219 billion by 2014.
The main driver behind this growth will be rural customers...
Demand for items such as televisions, smartphones and computers in small cities and rural areas will bolster these numbers, according to Business Monitor International. This is due in part to the expansion of a government program that subsidizes electronics purchases for rural customers. You read that correctly: The Chinese government is helping its rural citizens "catch up" to the urban middle class by offering price breaks on LCD televisions, computers and phones.
Fortunately for us, there are scores of publicly traded Chinese electronics firms that are set to greatly benefit from the expansion of electronics sales in the People's Republic. They're easy to buy through any broker, but thanks to cryptic financials and plenty of Wall Street noise, it's absolutely imperative that you do your homework before you put your cash on the line with any of these tin y companies

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